Theory is a good way of understanding what you're hearing, and it porvides you short cuts of undertanding where you want to go with the instrument. There are may ways to teach, and teach successfully ... ear training is important. I think very important for banjo, and other folk style instruments - but theory cannot hurt, (as long it doesn't discourage the player/student, of course).

I think a lot about this subject, now - as an old, long time player. I know that the work I put into practice and learning as a kid make all the difference in my progress as an adult. I than God every day that I loved music enough as a kid to work at learning (I didn't think of it as work). It has made me a much better player today. But I could have spent more time on theory. It would help me be more communicative with other musicians - it could have helped my ability to pick up other insturments. Now I depend upon "feel" if I try to define what it is, where I'm going, I have a harder then if I feel my way through it.

I play instruments with several tunings, between banjo, guitar - different chord forms, etc. Sometimes, unless I'm on my primary instrument (standard guitar) people will ask what key I'm in or what chords I'm playing - and I have to really work to tell 'em - but I could easily improvize and follow along with them, if I don't think about what I'm doing.